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Law of Equi-Marginal Utility Explained

The law of equi-marginal utility states that a consumer will allocate their limited income across different goods in a way that equalizes the marginal utility per unit of expenditure. This ensures the consumer achieves maximum satisfaction. For example, if a consumer has Rs. 8 to spend on pens and pencils, with pens costing Rs. 2 each and pencils Rs. 1 each, the consumer will buy pens until the marginal utility of the next pen equals the marginal utility of the next pencil, maximizing their total utility within their budget. This law assumes consumers rationally allocate their income to maximize utility subject to price and budget constraints.

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82 views18 pages

Law of Equi-Marginal Utility Explained

The law of equi-marginal utility states that a consumer will allocate their limited income across different goods in a way that equalizes the marginal utility per unit of expenditure. This ensures the consumer achieves maximum satisfaction. For example, if a consumer has Rs. 8 to spend on pens and pencils, with pens costing Rs. 2 each and pencils Rs. 1 each, the consumer will buy pens until the marginal utility of the next pen equals the marginal utility of the next pencil, maximizing their total utility within their budget. This law assumes consumers rationally allocate their income to maximize utility subject to price and budget constraints.

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LAW OF EQUI -MARGINAL UTILITY

The Law of D.M.U explains consumer’s behaviour when a


single good is consumed.

But every consumer consumes several commodities like Rice,


Dal, Cloth, medicine , bus-rides etc.

As his resources are limited , he distributes his money carefully


so as to get maximum utility from his limited income.
Experience shows that a consumer gets E.M.U when he
distributes his expenditure in such a way that the Marginal
utility of the last unit of money spent on every good is equal.

This law is called the Law of maximum Satisfaction.


Dr Alfred Marshall defined the Law thus, “ If a person has a

thing which he can put to several uses , he will distribute it

among these uses in such a way that it has the same marginal

utility. For if it had a greater marginal utility in one use than

another , he would gain by taking away some of it from the

second and apply it to the first” .



This can be explained with an example- Let us suppose a
consumer has 5 mts of cloth which he can put to 2 uses – Use A
and Use B . Marginal utility of these 5 metres of cloth is shown
in this following table :
Metres of Cloth M U in use ‘A’ M U in use ‘B’

1 50 40

2 40 30

3 30 20

4 20 10

5 10 0


Example : Let us say a consumer has Rs 8/- and he wants to
spend this on Pens and Pencils . Let us suppose that the Price of
Pen is Rs 2/- and the Price of pencil is Rs 1/-.
The Marginal Utility of the units are shown below
UNITS M U of Pens M U of Pencils
( Price Rs 2/ each ) ( Price Rs1/ each )

1 6 2

2 4 1

3 2

4 1 0
The Consumer’s problem is to budget his limited income to get
maximum total utility.
He is guided by two factors
1. Marginal utility of Goods.

2. Price of the goods



This law can be explained with the help of a graph

ASSUMPTIONS

1. Utility is measured in terms of money.

2. Income is limited and constant.

3. Marginal Utility of Money is constant.

4. There exists Perfect competition.

5. Law of Diminishing Marginal Utility holds good.


LIMITATIONS

1. Law is based on unrealistic assumptions.

2. Measurement of Utility is not possible.


3. Law cannot be applied to indivisible goods. Example: we
cannot equate utility of a TV set to a cup of coffee.

4. Consumer does not behave rationally at all times.

5. Marginal utility of money is not constant.


SIGNIFICANCE
1. It applies to consumption
With the help of the Principle of substitution the consumer is
able to make the best choice of his wants to get maximum
satisfaction.

2. It applies to Production
With the help of the Principle of substitution the Producer can
use the most economical factors of production.
3. It applies to Exchange
It helps in the adjustment of demand and supply by
substitution.

4. It applies to Welfare and Public Finance


The Principle of Maximum Social advantage involves the Law
of substitution where it states that revenue must be distributed in
such away that it brings equal welfare to all classes of people.
THANKYOU

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